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Supreme Court rules on post-dated cheque given as security for repayment of loan instalment

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In Sampelly Satyanarayana Rao v Indian Renewable Energy Development Agency Limited(1) the Supreme Court held that a dishonoured post-dated cheque for repayment of a loan instalment that was described as 'security' in the loan agreement was covered by Section 138 of the Negotiable Instruments Act 1881. In accordance with Section 138, it is an offence for a person to issue a cheque which is subsequently dishonoured from an account maintained by him or her in order to pay any amount of money to another person from that account for the discharge, in whole or in part, of any debt or other liability.

While deciding whether dishonoured cheques issued to discharge existing liability fall under Section 138 of the act, the Supreme Court further explained that the question of whether a post-dated cheque is for "discharge of debt or liability" depends on the nature of the transaction. Section 138 is attracted only if, on the date on which the cheque was issued, liability or debt existed or the amount had become legally recoverable.

Interpreting the word 'security' as used in the underlying agreement between the parties, the Supreme Court held that it referred to the cheques issued to repay instalments of the loan the moment that the loan was due. Once the loan was disbursed and the instalments fell due as per the agreement, the dishonoured cheques fell under Section 138 of the act.

Facts

Within the agreement, the respondent – a government enterprise engaged in the development of renewable energy – agreed to advance a Rs115 million loan to the appellant to begin work on a four megawatt biomass-based energy project in Andhra Pradesh. It was agreed that post-dated cheques would be furnished by way of security towards repaying instalments of the loan (principal and interest). The post-dated cheques issued by the appellant by way of security were dishonoured on presentation and complaints were filed by the respondent in the court of the concerned magistrate in New Delhi against the appellant and its director.

High court decision

The appellant approached the Andhra Pradesh High Court, seeking to quash the complaints arising out of 18 cheques with a total value of about Rs103 million. It was argued that the cheques were given by way of security and that on the date on which the cheques were issued, no debt or liability was due on the same. In other words, the post-dated cheques were not to discharge existing debt or liability, but rather for a future amount; therefore, it was contended that Section 138 of the act did not apply.

The high court rejected the appellant's argument, holding that when the post-dated cheques were issued, the loan amount had been authorised and was an existing debt or liability and thus fell within the scope of Section 138 of the act.

Supreme Court decision

In its decision, the Supreme Court considered whether a post-dated cheque to repay loan instalments and described as security in the loan agreement which is subsequently dishonoured is covered by Section 138 of the act.

The Supreme Court held that whether a post-dated cheque is for "discharge of debt or liability" depends on the nature of the transaction. If, on the date on which the cheque is issued, liability or debt existed or the amount is legally recoverable, Section 138 of the act will be attracted.

In the case at hand, although the word 'security' was used in the agreement, the term referred to the cheques being issued to repay the loan. It was held that the repayment of the loan amount fell due under the agreement the moment that the loan was advanced and the instalments fell due; thus, the dishonoured cheques fell within the scope of Section 138 of the act. As such, the dishonoured cheques represented outstanding liability.

In its judgment, the court distinguished between a cheque given towards an advance payment for a purchase order and post-dated cheques given under a loan agreement.

In doing so, the Supreme Court referred to its judgment in Indus Airways Private Limited v Magnum Aviation Private Limited,(2)in which it was held that if the cheque towards advance payment is dishonoured, it will not give rise to criminal liability under Section 138 of the act. However, the purchaser may be liable for breach of contract when the contract provides that the purchaser must pay in advance.

The Supreme Court further observed that the crucial issue for consideration was whether the cheque represented a discharge of existing enforceable debt or liability or whether it represented advance payment without there being subsisting debt or liability. While issuing its decision, the Supreme Court also relied on several earlier judgments to hold that cheques issued towards partial repayment of fees under a loan agreement would be an existing enforceable debt and their dishonour would attract consequences under Section 138 of the act. Specifically, reference was made to Rangappa v Sri Mohan,(3) where it was held that once a cheque has been issued and signed, the presumption of legally enforceable debt in favour of the holder of the cheque arises and it is for the accused to rebut the argument.

Thus, the Supreme Court found in favour of the respondent and upheld the high court's decision that dishonoured cheque which are issued to discharge an existing liability are covered under Section 138 of the act.

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